27/10/2011

For constitutional reasons the governing rules of a self managed superannuation fund with individuals as trustees must make provision for the pension primary purpose.  However, this does not preclude the fund from making lump sum benefit payments.

1.    The ATO ABN Form Page 10 quoted incorporates the requirements of Section 19(3) of the SIS Act 1994.  A regulated fund must have a constitutional corporation as trustee pursuant to a requirement contained in the governing rules (thereby allowing it to be regulated by the Federal Government under the Corporations power in the Australian Constitution); or the governing rules must provide that the sole or primary purpose of the fund is the provision of old-age pensions (thereby allowing it to be regulated by the Federal Government under the "Pensions Power" in the Australian Constitution).

2.    The ATO has confirmed that pension funds established under the "Pensions Power" of the Constitution may also make lump sum payments, subject to certain requirements.

3.    In the NTLG minutes of February 2006 and March 2010, the ATO considered that:

• section 19 does not require the trustee of pension funds to start a pension before providing a lump sum benefit;
• the rules of the fund must provide that the fund’s objective intention is to pay a pension; and
• the lump sum must be paid in accordance with the fund’s governing rules.

4.    In the publication “Roles and Responsibilities of Trustees”, the ATO also stated:
“A fund that has individual trustees must state in the trust deed that the fund was established for the sole or primary purpose of providing old age pensions.  However, this does not prevent the fund from paying lump sum benefits providing the trust deed allows for this.”

5.     The SUPERCentral governing rules expressly incorporate this requirement in Clause 2.4, as follows:

“At any time when the trustee of the Superannuation Fund is not a constitutional corporation then the primary purpose of the Superannuation Fund will be the provision of old-age pensions for the Members.  However, this will not prevent the Superannuation Fund paying benefits in the form of lump sums”. 

6.    So in summary, a SMSF with individual trustees may pay both lump sum and pension benefits to members, as long as

• the governing rules make provision for the old-age pension primary purpose and

• the lump sum is paid in accordance with the fund’s governing rules.
  

If you have any questions in relation to this article, please contact TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.